Yahoo rejects Microsoft's bid

Board unanimously concludes that Microsoft's half-stock, half-cash offer "substantially undervalues" Yahoo. Yang's follow-up letter to Yahoo staffers

Yahoo on Monday announced that it is rejecting Microsoft's multibillion-dollar buyout offer, saying that it undervalues the company.

The announcement had largely been expected, as reports emerged over the weekend such a decision had been made by Yahoo's board of directors.

"Yahoo's board of directors has carefully reviewed Microsoft's unsolicited proposal with Yahoo's management team, and financial and legal advisers, and has unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders," the company said in a statement Monday.

"After careful evaluation, the board believes that Microsoft's proposal substantially undervalues Yahoo, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow, and earnings potential, as well as our substantial unconsolidated investments," the company further noted.

Yahoo said its board will continue to evaluate its strategic options and pursue a path to "maximize value for all stockholders."

"It is unfortunate that Yahoo has not embraced our full and fair proposal to combine our companies," Microsoft said in a statement Monday. "Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," the company statement said.

The software giant reiterated its stance that it "reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value" in its proposal.

Microsoft, which on February 1 offered a cash-and-stock deal initially valued at $44.6 billion , is likely to already have contingency plans, such as attempting to create a board of directors that would be friendlier to a Microsoft deal, said proxy solicitors.

Yahoo's annual nomination process for board elections is set to start Wednesday and run through March 14, according to a U.S. Securities and Exchange Commission filing. Each year, all 10 of Yahoo's board seats are up for grabs.

If Microsoft walked away from its offer, where do you think the stock would go?
--Kevin Landis,
chief investment officer,
Firsthand Capital Management

Microsoft may already be eyeing those seats.

"If they haven't done it already, they're in the process of assembling an appropriate slate," said Bruce Goldfarb, a veteran proxy solicitor. "It's fair to assume they will run for board seats, and it won't take them long to fill the slate. We're talking Microsoft here. They have resources and access to countless high-quality candidates to be a director."

Should Microsoft move forward in launching a proxy fight, it's difficult to say whether it will stake its flag early in the four-week window or wait closer to March 14. Timing is based on the state of negotiations, as well as the personalities who are pushing for a merger, Goldfarb said.

"By launching it early, it says, 'We're serious and ready to go. The pressure is on, and we can always pull back, but know we are there,'" Goldfarb said, adding, "Personality is always a factor in a proxy fight decision. It has a strong effect on how a decision is made."

Should Microsoft launch a hostile bid for Yahoo, one proxy solicitor said, it's likely that Yahoo will go to the Department of Justice and lodge complaints over antitrust issues related to a merged company.

In the current regulatory environment, Microsoft may surmise that its merger proposal will not be blocked. But Microsoft is also aware that the situation could change after national elections this fall, according to a proxy solicitor who requested anonymity.

Similar measures were taken by PeopleSoft, which nearly five years ago found itself the takeover target of a hostile bid by Oracle .

Although the Department of Justice stepped in and filed a lawsuit to block the merger, the agency was ultimately overruled by a federal judge in San Francisco. The 18-month saga eventually ended in late 2004, when PeopleSoft accepted Oracle's offer, valued at $10.3 billion .

Yahoo's institutional investors are eyeing Microsoft's offer and weighing their options. Should the software giant prevail--either through a proxy contest or tender offer--and a vote is put to Yahoo shareholders, one institutional investor said he would probably take the money.

"They're offering a lot more than the market was willing to pay before their offer. If Microsoft walked away from its offer, where do you think the stock would go?" said Kevin Landis, chief investment officer of Firsthand Capital Management, which manages more than $600 million in assets.

Firsthand's Yahoo stake amounts to more than 300,000 shares, of which half are held in its flagship Firsthand Technology Value fund.

Landis noted that should Yahoo ultimately pass on Microsoft's offer, it may take a year for the stock to rise back to the level of Microsoft's bid. And during that time, investors could have taken Microsoft's cash and reinvested it in other beaten down but promising technology stocks, Landis said.

Yahoo's shares dipped slightly to $29.55 in morning trading as Yahoo released news that it rejected Microsoft's offer. But its share price is still substantially higher than the $19.18 closing price on January 31, a day before Microsoft's buyout bid.

Since late October, Yahoo's share price has fallen off its 52-week high of $34.08 per share.

Firsthand has owned its Yahoo stake for about a year, purchased in part because of Yahoo's launch of its long-awaited Panama search-advertising platform in late 2006; its ownership stake in Chinese business-to-business site Alibaba.com, which had a tremendous IPO on the Hong Kong exchange in November; Yahoo's balance sheet; and its "reasonably" priced stock, Landis said.

Although Yahoo's stock has underperformed during that time, Firsthand has largely maintained its ownership stake in the company. But Landis said he would probably take Microsoft's money, if given a chance.

One thing that Landis, as well as other institutional investors would have to contend with if they own both Yahoo and Microsoft, is what to do with their Microsoft position.

Firsthand has owned Microsoft shares for years, although it's a smaller stake than its Yahoo holdings. Landis, as well as other similarly situated investors will have to consider whether to sell off some of their newly inherited Microsoft position, should a deal go through, or increase the percentage of Microsoft shares in their portfolio.

"Microsoft is already pretty much where we want our position," Landis said. "There could be some selling pressure on Microsoft, but all the (arbitragers) have figured that out."

Since announcing its Yahoo bid, Microsoft's shares have fallen roughly 14 percent, to about $28 this morning.

Cambiar Investors is one Microsoft shareholder that liquidated its holdings after the Yahoo buyout bid news.

"We...liquidated on the news," said Brian Barish, Cambiar president. "Microsoft knows even less about the Internet than Yahoo. I can't see how they can make the business better."

 

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